Jackson Hole: Myth of the All Powerful Central Banker Continues ... For Now

Markets waited with bated breath for Fed Chair Janet Yellen's and ECB Mario Draghi’s speeches at the annual gathering of central bankers in Jackson Hole, Wyoming.Market participants were once again focussed on the short term and the silly ‘will she, won't she?’ debate regarding Bernanke’s successor Yellen at the Jackson Hole symposium.

We believe that further U.S. QE and money printing remains very likely given the poor structural state of the U.S. economy. We advise investors to fade out the short term noise emanating from Jackson Hole and from assorted policy makers on both sides of the Atlantic and focus on the reality that further monetary easing and currency debasement will continue for the foreseeable future.

ECB President Mario Draghi is under pressure to use his last remaining tool -- printing money to buy huge amounts of bonds.

"We stand ready to adjust our policy stance further," Draghi said.
The bank has cut interest rates, offered cheap loans to banks and is weighing up making asset purchases to pump more money into the economy, but Draghi did not offer new guidance on when the bank might take action.There are continuing hopes that the ECB will embark on QE even though it has been less than successful in Japan and the jury is still out regarding its efficacy in the U.S.The market believes EU QE is unlikely in the short term but there is a growing consensus that it will be seen in 2015. This would be bullish for gold prices, especially in euro terms.Gold prices fell after minutes from the Fed's July meeting on Wednesday showed policy makers debated whether interest rates should be raised earlier. Gold has fallen this week and there is speculation that it was due to fears that the Federal Reserve could hike interest rates sooner than expected.However, if that were the case then stock markets would have also come under pressure instead of marching on to new record highs. From a market perspective this is very counter intuitive and suggests gold’s falls were for another reason. A four-day rally for U.S. stocks carried the S&P 500 index to a fresh record yesterday. The S&P 500 reached 1992.37, its 28th record finish of 2014 and first since July 24.Market talk is of Yellen pushing the S&P to new records at the psychological 2000 level. Irrational exuberance is alive and well on Wall Street and being stoked by the ultra loose monetary policies of Yellen and her merry band of Jackson Hole cohorts. It is worth noting that copper is heading for a 3% gain this week as are some other commodities. If markets were genuinely concerned regarding a sudden rise in interest rates, commodities and all risk assets would be under selling pressure.Some market participants will rightly ask - why is it only gold and silver that have seen sudden declines this week?The dollar hovered just below its 2014 peak against a basket of major currencies today. Dollar gains this week have pressurised gold. Speculators fear that better than expected data might prompt the Fed to raise interest rates.

Rising rates would hurt bonds and equities but would support gold. This was clearly seen in the 1970s when rising interest rates corresponded with rising gold prices. Gold becomes vulnerable towards the end of an interest rate tightening cycle when there are positive real interest rates and savers earn something on their deposits. It is important to remember that central banker’s strategies of ultra loose monetary policies contributed in a significant way to the global financial crisis. Low interest rates by central bankers and Alan Greenspan in particular led to rampant speculation and risk taking on Wall Street, collateralised lending, the sub prime crisis and the stock and property bubbles. Will a continuation of the same monetary policies that got us into the financial crisis really get us out? Conventional wisdom is that yes it will. However, the jury remains out on that question and time will tell.History suggests that currency debasement on the scale we are seeing will end in significant inflation.